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To say that William Leland Edwards of Palo Alto Investors invest heavily in healthcare stocks would be, well, a bit of an understatement. The fund’s positions read like a pharmaceutical sales rep’s resume, with the top five positions, more than 50% of the entire portfolio, all coming from the biopharmaceutical sector. Mr. Edwards has no medical training and does not hold a degree in biology or chemistry. But what he does have is a knack for picking some of the best performing stocks in this sector of the market. It’s always crucial to look at hedge fund sentiment for its market-beating potential, so let’s look at the top five positions in the Palo Alto Investors equity portfolio:

At number one is Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) which develops treatments for liver, kidney and stomach cancer. Earlier this year, Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) along with Bayer AG (BAYN) won expanded FDA approval for Stivarga, a treatment for stomach cancer. The news helped take some of the sting out of Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX)’s disappointing 4Q earnings which reported a 19% drop in revenue, a 22% increase in costs and a sharp decline in yearly earnings from -$0.66 to -$2.50. Stivarga could potentially earn Onyx Pharmaceuticals, Inc. (NASDAQ:ONXX) and BAYN as much as $1.3 billion annually.

Second on the top five is Cyberonics, Inc. (NASDAQ:CYBX) a medical-device manufacturer that develops implantable medical devices that provide neuromodulation therapy for the treatment of epilepsy and treatment-resistant depression. Cyberonics, Inc. (NASDAQ:CYBX) recently reported 1Q earnings demonstrating that the company continues to show consistent revenue growth while keeping R&D costs contained; net sales were up 15% and income from operations rose 25%. Recent insider selling of the stock pressured share prices and the stock is currently trading towards the bottom of its 52-week range of $36.25 to $56.73.

Biotechnology company Viropharma Inc (NASDAQ:VPHM) comes in at number three. Although the debt/equity ratio for this company looks good, its trailing earnings ratio is a shocking 303x versus the industry average of 61x. And analysts warn that because the patent protection on some of its big earners, such as Cinryze, is limited, the growth potential isn’t very encouraging. Since late last year, the stock has been moving in a sideways trend with a slightly lower bias, unable to break resistance at $25.55.

Coming in fourth on the list is United Therapeutics Corporation (NASDAQ:UTHR), of which Palo Alto holds the largest position at 1,208,711 million shares. The company recently reported very strong earnings – revenue was up for 2012 from $195 million to $244 million which boosted earnings to $1.65 per share vs $0.79.